Ukraine: Creating the right landscape

Author: | Published: 1 Apr 2009
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In order to attract foreign investments into an economy a government can establish a more favorable legal regime for investment activities. Among the main instruments that create this legal regime are state guarantees of loyalty towards foreign investors' rights.

There is a number of statutory acts that protect foreign investments in Ukraine. The legal status of foreign investors is defined in the following statutes: Act of Ukraine, On Protection of Foreign Investments dated 10.09.1991 No. 1540; Act of Ukraine, On Investment Activity dated 18.09.1991 No. 1560; Act of Ukraine, On Regime of Foreign Investments dated 19.03.1996 No. 93/96; and Act of Ukraine, On Foreign Economic Activity dated 16.04.2001 No. 959.

In addition to the national legislation, state guarantees to investors are established by bilateral and multilateral international treaties ratified by Ukraine. Bilateral investment treaties have been signed with 46 countries including Germany, Switzerland, USA, France, Turkey, Austria, Kuwait, Jordan, Canada, Italy.

Foreign investors' rights

Foreign investors in Ukraine have the same entitlement to protection of their rights and interests as Ukrainian entities and individuals, including the right to claim for damages.

Particular significance is attached to those guarantees that are related to resolution of investment disputes because they constitute one of the most important means to secure all other types of guarantees granted to investors.

If a dispute arises relating to the business activity of a foreign company in Ukraine, that company has the right to apply to a court in an appropriate jurisdiction as prescribed by the current legislation of Ukraine. This dispute, if not otherwise prescribed by international treaties or the laws of Ukraine, can be tried in commercial, administrative, arbitration, general jurisdiction courts, or the International Commercial Arbitration Court. The choice of the court jurisdiction will depend on the subject matter of the dispute and the nature of the parties involved.

For example, Ukraine is a party to the US Convention on the Settlement of Investment Disputes between States and Nationals of Other States. So investment disputes can be settled under the procedures stipulated by the above Convention in the Arbitration Court of the International Centre for Settlement of Investment Disputes. This Arbitration Court has been founded under the aegis of the International Bank for Reconstruction and Development.

Court case research shows that foreign investors in Ukraine use judicial protection to defend their interests. In 2007 and 2008, out of the total caseload of commercial disputes in which companies with foreign investors or foreign companies were parties, 32% were property disputes, 23% extra-contractual disputes (recognition of property rights, gaining access to property, cancelation of state registration), 20% administrative appeals of acts passed by government and self-government authorities, 20% corporate disputes, 2.5% bankruptcy disputes; and 1% intellectual property disputes.

Litigation

Litigation in Ukraine is regulated by the Commercial Procedure Code of Ukraine. It regulates litigation that arises out of contractual and business relations between legal entities or shareholders on matters related to the business activity of companies. Court procedures are also regulated by the Administrative Procedure Code of Ukraine, which governs resolution of disputes associated with execution by public authorities of their powers. Finally, the Civil Procedure Code of Ukraine regulates resolution of disputes arising out of civil, residential, land, family, labour relations between individuals or between individuals and legal entities (except for corporate disputes).

Disputes with foreign companies can be resolved by commercial courts or courts of general jurisdiction in the country of a plaintiff or a defendant based upon the procedure legislation of that country, if otherwise is not specified in an international treaty or an agreement between the parties to the dispute.

Jurisdiction clauses

So when entering into agreements foreign companies must pay special attention to clauses that specify the place and the body authorized to adjudicate disputes. Such a precaution will allow the foreign party to choose the most favorable jurisdiction for defending its interests and to avoid facing possible problems related to the current procedural and substantive legislation.

The contradiction between section 76 of the Act of Ukraine, On International Private Law and section 123 of the Commercial Procedure Code of Ukraine is worth noting. Under section 123 of the Commercial Procedure Code foreign companies and organisations have the right to go to commercial courts to defend their infringed rights and interests protected by law according to the established jurisdiction.

According to sections 4-1, 12-17 and 123 of the Commercial Procedure Code, foreign business entities are subject to the national regime of litigation by the commercial courts of the appropriate jurisdiction. Because the Code does not prescribe for prorogated jurisdiction, the interested party may apply to a local commercial court only in compliance with sections 13-16 of the Civil Procedure Code on territorial and exclusive jurisdiction for actions subject to adjudication in the first court instance.

At the same time, under section 76 of the Act of Ukraine, On International Private Law, courts may review any actions with foreign elements in the following cases:

  • if the party to the agreement assigned jurisdiction for a lawsuit with a foreign element to courts of Ukraine, except for cases set forth in section 77 of the above Act;
  • if the defendant is located or has movable or real estate that can be recovered from, or a branch or a representative office of a foreign-entity defendant in Ukraine;
  • in cases for damage recovery, if the damages were caused in Ukraine;
  • if an action or an event that became the grounds for filing a lawsuit occurred in Ukraine;
  • in other cases prescribed by the laws of Ukraine and an international treaty of Ukraine.

There is a number of statutory acts that protect foreign investments in Ukraine.

In respect to this matter the Supreme Court of Ukraine has ruled that under section 38 of the Act of Ukraine, On Foreign Economic Activity, disputes arising between foreign business entities in connection with business activity may be tried in the courts of Ukraine and under the parties' consent in the International Commercial Arbitration Court or Marine Arbitration Commission of the Chamber of Trade and Industry of Ukraine and in other bodies authorized to resolve disputes. Exceptions occur if they contravene the current laws of Ukraine or international treaties of Ukraine. Section 76 of the Act of Ukraine, On International Private Law, stipulates that courts may accept and hear any actions with foreign elements, particularly if the parties provided in the agreement jurisdiction for the action with a foreign element to the courts of Ukraine, except for cases stipulated in section 77 of the above Act.

It should be mentioned that application of section 76 of the Act of Ukraine, On International Private Law, is not in conflict with the provisions of section 123 of the Commercial Procedure Code of Ukraine. In case of a trial involving a foreign party, the said Act will be a special one and will prevail over the Commercial Procedure Code. Therefore, it cannot be the reason in law for rejection to try a case in compliance with a prorogated jurisdiction based on the fact that the Commercial Procedure Code does not prescribe for this type of jurisdiction.

It must not be omitted that if the parties to the dispute agreed upon the jurisdiction for the trial and the suit is filed with a breach of the above agreement then such a suit is subject to rejection.

Court precedent

In one of its cases the High Commercial Court of Ukraine ruled that the subject matter of the dispute is the nullity of the agreement on cession of rights between Opened Joint-Stock Company Dniprovs'kyi Metallurgic Plant named after F.E. Dzerzhinskyi, and Latin American Export & Import Inc, dated April 4 2006. This is based upon the agreement No. 22YK dated May 17 1999 and the additional agreement (made between the plaintiff and Latin American Export & Import Inc).

Sections 10.2 and 10.3 of the agreement No. 22YK specify that if the parties do not resolve their disputes within 30 days after the first negotiations are held, then the disputes are to be settled by the arbitrage. In such a case a dispute will be subject to the jurisdiction of the International Commercial Arbitration Court of the Chamber of Trade and Industry of Ukraine in compliance with rules of arbitration proceedings of the above court. Under such circumstances the Court concluded that though a party to the agreement No. 22YK was changed, the agreement itself, including the arbitration clause, remains valid and binding. It means that the parties on their own established prorogated jurisdiction for the case pursuant to section 12(2) of the Commercial Procedure Code of Ukraine.

According to the general rule, established by the current procedural legislation of Ukraine, a court must try an administrative, commercial or civil case within no more than two months. But in cases stipulated by the law the mentioned term can be extended or shortened.

It should be noted that foreign entities are as equally liable as Ukrainian ones. They also bear the burden of proof of the claims included in the statement and according to which they seek to recover damages.

Prejudice and corruption

The main purpose of this article is to shed some light on the specifics of the Ukrainian justice system that unforutunately is used by foreign companies only as the last resort of protection of their rights and interests, an is not intended to cover specific requirements for conducting trials established by law.

Recently there are more and more reports in both Ukrainian and foreign media on how prejudiced the courts in Ukraine are, how often they delay trials, and how corrupt the judicial system is.

This was confirmed by the 2008 Annual Report issued by the US Department of State Overseas Security Advisory Council. The Report indicates that in 2008 US businesses faced increased pressure from the authorities in Eastern European countries. Among the states where corruption has substantially increased in recent years Ukraine, Russia, Romania and Bulgaria were listed. The Report says that hostile takeovers of businesses by shady methods associated with the use of state authorities, including judiciary, and initiated by governmental officials and persons connected with the criminals cause great disturbance within society.

It is the opinion of many researchers studying this problem that one of the main reasons for such corruption in courts of Ukraine is the overly complicated procedure of holding judges liable. Pursuant to section 13(2) of the Act of Ukraine, On the Status of Judges, a judge cannot be detained or arrested without the consent by the Verkhovna Rada of Ukraine (Ukraine's legislative body). Such a detention or arrest for the purposes of pre-trial investigation can be initiated by a pre-trial investigation agency, for example the public prosecutor's office.

Judge liability

The legislation of Ukraine also prescribes an effective approach to fighting against the prejudiced practices of courts. It contains the mechanism of holding judges disciplinarily liable and can lead to their removal from office for being prejudiced in court.

According to section 96 of the Act of Ukraine, On Judiciary System in Ukraine, a judge can be held disciplinarily liable under the order of the disciplinary proceedings on the grounds prescribed by the Act of Ukraine, On Status of Judges that are, for instance, breach of law by a judge during a trial, actions by a judge that defame the title of a judge and lead to the doubts about the judge's objectivity, impartiality and independence. In addition, a reversal or change of a court decision is not the ground in law for holding disciplinarily liable the judge who made that decision, if it was not related to intentional breach of law or malpractice that had substantial consequences.

The procedure for holding a judge disciplinarily liable can be initiated by the people's deputies, the Parliament Commissioner for Human Rights, the Head of the Supreme Court of Ukraine and the Head of a High Specialized Court, the Supreme Qualification Commission of Judges of Ukraine, and the High Council of Justice. Based on the results of these proceedings a Commission can recommend that the High Council of Justice of Ukraine submits to a body or an official that appointed a judge a recommendation to dismiss this judge from office. For the time of disciplinary proceeding the judges power can temporarily be stopped.

This mechanism is an effective remedy for national and foreign companies. For instance, in 2007 5842 complaints on the actions of the judges were lodged with the Council of Judges of Ukraine. The regional councils considered approximately 11000 similar complaints. Among others the complaints were submitted by the people's deputies of Ukraine (92 complaints), the Ministry of Justice of Ukraine (110), the High Council of Justice (47), the Secretariat of the President of Ukraine (79), the Supreme Court of Ukraine (59), and the Supreme Qualification Commission of Judges of Ukraine (37).

The complaints mostly focused on breach of substantive and procedure legislation by the judges during the trials (65.6%); breach of the term for considering a case (15.8%); prejudice and unethical behavior of judges (9.3%); improper organisation of work in the courts (4.9%); and improper notification about the time and place of a trial (1.9%).

In 2008 four out of five applications by the General Prosecutor's Office for the detention and arrest of the judges were approved by the Supreme Court of Ukraine.

In 2008 the Head of the Supreme Court of Ukraine filed to the High Council of Justice seven applications to recommend dismissal of judges for breaching the oath. In addition, several motions were submitted to the appropriate qualification commissions of judges to initiate disciplinary proceedings against the judges. Some of them were subsequently allowed and the judges who violated the law were held disciplinarily liable.

Based on the latest research of court cases associated with land disputes resolution, the Head of the Supreme Court of Ukraine submitted to the High Council of Justice four motions regarding dismissal of the judges for breaching the oath.

Quality of counsel

Another significant factor that can negatively influence the judicial protection of foreign companies' interests is the quality of legal representation in courts.

As a rule, for representation in courts foreign companies use lawyers from the Ukraine offices of major international law firms or attorneys from large national firms. The Ukrainian legal services market is represented by a great number of both nationwide and regional law firms. Often, the quality of legal services provided by many of them is very low in comparison to law practice standards adopted by bar associations in the USA or Europe. This fact is due to the absence in Ukraine of any control by state authorities over the entities and individuals that provide legal services.

Under section 4 of the Act of Ukraine, On Entrepreneurship, legal services could be provided only under a license issued by an appropriate state authority. But after the adoption and coming into force on October 22 2000 of the Act of Ukraine, On Licensing of Certain Types of Business Activity, such a requirement (in respect to law practice) was repealed. Meanwhile, licensing law practice allowed to admit to the legal services market only those entities and individuals that complied with the established qualification requirements, had the adequate professional expertise and experience in the field.

Unfortunately, many of the players on the national market of legal services often not only have no appropriate work experience, but also lack basic professional knowledge of jurisprudence.

So when choosing an attorney or a law firm for representation, foreign companies must examine all the available data about this attorney or law firm in detail. It is advisable to carefully study the law firm's staff, its experience in the legal services market, its specialization, the list of its clients and implemented projects. Companies should also obtain information about the specific individuals who will study and resolve problems. It is also suggested to draw special attention to whether or not the law firm of choice is a member of both national and international professional networks, and the availability of details of international work experience and references. Otherwise, it should not be a surprise that regardless of large fees paid for legal services the representation will be carried out by a lawyer who just recently graduated from a law school and lacks the necessary experience and skills.

Growing competition in the legal services market motivates lawyers to elevate the quality of the services they provide. Many law firms in Ukraine are members of international legal associations and adhere to internationally accepted law practice standards. In respect to pricing policies, legal services provided by Ukrainian law firms appear to be substantially more favorable than those of foreign competitors. So in Ukraine there is a unique situation for foreign investors when (considering that the right choice of an attorney or a law firm was made by an investor) for reasonable rates it is possible to acquire legal services of equal or even higher quality than those provided by foreign law firms.

Author biography

Oleksiy Kharytonov

Inyurpolis

Oleksiy Kharytonov is a partner with the firm in the litigation division. His areas of expertise are civil and administrative procedure, mediation, administrative law, state and local administration development. Kharytonov is also actively involved in scientific research related to legal regulations of the Permission System in Ukraine. He has written more than 15 articles. Among them are the following: Problem Questions of Medical Confidentiality in Ukraine (2007), If Your Register Was Stolen: Problems of Illegal Take-Over in Ukraine (2007), Problem Questions of Legal Regulations of the Narcotics Circulation in Ukraine (2006) and Certain Aspects of Legal Regulations of the Fire Arms Circulation in Ukraine (2004). Outside the practice, Kharytonov is an associate professor of the Department of Legal Support of Commercial Activity at the Kharkiv National Academy of Municipal Services. He has taught the courses on Business Law, Claims and Legal Actions and Normative Support of Local Administration for more than four years.

Sergiy Silchenko

Inyurpolis

Sergiy Silchenko is a partner with in the labour law division. He specialises in labour law, business law, budget law, leasing, administrative and civil procedure. Silchenko has written more than 50 articles. Among them are the following: What Foreign Investors Need to Know About Ukrainian Labor Legislation (2008), The Role of Labor Law in Raising the Quality of Labor: Certain Theoretic Questions (2006), Do Ukrainians Need European Benefits on Their Way Into the European Community: Thoughts on Ways to Reform Social Legislation of Ukraine (2006) and Labor Contract – Is There an Alternative? (2001). Outside the practice, Silchenko is an associate professor of the Department of Labor Law at the National Law Academy of Ukraine. He has taught the courses on Labor Law and Social Security Law for more than eight years.


 


 

 

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